Ariad Pharma (ARIA): Bullish Option Spread Targets 2H 2011 Catalysts

This was an interesting spread I came across after hours, and after some research it looks like a very nice trade...

Ariad Pharma (ARIA) call volume jumped to 3X daily average as the August $11 / January 2012 $11 calendar call spread traded 2,500 contracts at $1.20 to open, the trader trying to time the Biotech for a move, looking for shares to stay near the $11 area through August expiration, and then potentially close the spread or let the January calls ride if the outlook is bullish. The spread is show below based on August expiration:



The spread traded as shares hit 5 year highs, although closing modestly lower, and overbought. Shares have tripled since last November, and volume has been strong lately with heavy accumulation. Ariad is a $1.35B Biotech that trades 7.6X sales and has a 10.65% short float. Ariad is in a strong trend, as seen below:



On June 20th, Oppenheimer raised its target to $13 from $11. Lazard reiterated a Buy with a $10 target on June 7th, and shares moved 25% and reached the target already. Lazard noted it expects Ariad to file for approval in the US and EU in 2H11, and forecast approval in the first half of 2012 for Ridaforlimus which has shown strong results, a 28% reduction in risk of progression in sarcoma and endometrial cancer. Lazard also notes that Pantinib in resistance CML is the most promising opportunity for Ariad, and data expected at ASH in December.

It is fairly clear from these event dates why this calendar call spread strategy is well designed, and has the potential to be very profitable as Implied Volatility jumps later this year in anticipation of the events.

The August/January $10 calendar call spread also makes for a solid trade if you see less near term upside, as the IV Skew has the $10 August calls bid up quite a bit. If more bullish, you could try the $12 strike, but regardless, the spread is set up well.

If you prefer not to take directional trades, you could look at the August/January Double Calendar or Diagonal Spread as more of a play on the likelihood of increased volatility later this year.

Philip Morris (PM): Option Trade Looks for Flame to Burn Out

I do a lot of work after hours scanning for any action in the options market I may have missed during the day, and this spread in Philip Morris really caught my eye as a large trade that makes a lot of sense with the current Technical and Fundamental outlook.

Philip Morris (PM) with a large spread in August as the $65/$60 ratio put spread traded 3,000X6,000 on the ISE at a debit of $0.42 to open. The spread profits with shares in the $55.42 to $64.38 range (Shown Below)




The spread comes as shares sold off on heavy volume and broke back below its 50 day EMA. Shares also broke through the neckline of a head and shoulders pattern that would target the 200 day EMA just below $62. Today's breakdown was the start of a new trend, according to DeMark and the ADX Crossover. The chart below shows the Head and Shoulders Breakdown:



The $118.5B cigarette maker has been on a major run and is finally showing weakness, and shares now trade 16.3X earnings, 1.73X sales and 25.5X cash flow, and the yield is now only 3.84%, so shares do look over-valued. The trade also comes as the FDA released new grisly warning labels to try and deter smoking, a potential impact to profits moving forward.

BofA raised its target to $78 in early June, noting strong pricing power. However, the Japan and Spain markets could see weakness due to recent events, and with the economy struggling, the spending on cigarettes could become more discretionary.

Ratio put spreads are often used as protection, and the small outlay here can yield a big return if shares head towards $60, while the risk is limited , because shares are not heading back below $55 due to value/yield buyers.

Smart Money Positioning for Late Summer Commodity Rally

Discovering trends in options activity often leads to the highest probability trades, and the recent trend has been large opening positions in commodity names, mainly the metals.

The S&P has corrected more than 8% in the last 2 months, while Metals (XME) have corrected more than 19% in the same time period, notable weakness in Coal, Steel, Iron Ore, Gold, Copper, and Steel stocks, with many of the individual stocks down more than 30%.

Commodities are considered a risky-asset, tied more closely to global economic growth than other industries, and a heavy reliance on China, India, and other growth markets. However, the group does appear to be over-shooting to the downside, especially if the 2H 2011 improves from 1H 2011.

The recent data also supports a bullish fundamental view on the metals, with China showing strong demand for Coal, Steel, and Iron Ore, while Japan is also seeing a demand surge as the rebuild begins.

Some of the leading Wall Street Research shops are also starting to make bullish calls, Credit Suisse out with a very bullish Copper forecast last week, and Steel Market Intelligence making a positive Steel call, flipping from a bearish call that was spot-on.

In the last two weeks I have seen large institutional buying in upside call options across most of the metal groups, and will highlight that action below. Alcoa (AA) earnings will kick off Q2 earnings season, and is a potential catalyst for a resurgence in the metals, although aluminum fundamentals are not looking quite as positive as the other metals.

Steel
Arcelor Mittal (MT)September $35 calls were active the last 4 days of last week, with open interest starting the week at 207 contracts, and on Friday 5,013 contracts traded against open interest of 30,228 that accumulated in the contract throughout the week, and the implied volatility of the contract rose more than 15%. Arcelor has held up much better than its peers and have been basing above $31. The $39.2B Steel giant is trading 7.1X forward earnings, 0.85 PEG, 0.59X sales, and 0.8X book value, making it one of the cheapest names in the industry, and also a Company interested in acquisitions. Option traders are positioning for shares to gain more than 13% in the next 3 months.

Copper
Freeport Mcmoran (FCX)shares have held well above the $46 double bottom from earlier in 2011, and face resistance with a descending trend line at the $50 level. It has outperformed most of the names in the metals sector, and Copper, often seen as a leading indicator for economic growth, has held the $4 level very strong since rebounding sharply off $3.90 lows in early May, a bullish divergence versus other metals. On Friday, a large holder in call options extended his/her play out another month, rolling 25,000 June $42 calls to the July $43 strike, and another rolled 12,000 June $47 calls to 12,000 July $46 calls. Freeport is another value name at 7.66X earnings, 2.23X sales, 3.3X book and 11.3X free cash flow. Deutsche Bank noted last week that the Company is likely to return money to shareholders via special dividends and has a Hold and $65 target. Morgan Stanley also recently reiterated an Overweight, noting improving Copper fundamentals.

Iron Ore
Vale SA (VALE)is a $155.87B mining giant, often focusing on its Iron Ore business, but also a major player in other metals, and becoming a force in the fertilizer space as well. Shares trade very cheap at 5.8X earnings, 0.45 PEG, 3X sales and 2X book value. Goldman reiterated a Buy in April with a $45 target, citing a strong upcoming Iron Ore cycle, and the new CEO should lift the uncertainty. Recent speculation is the Company could announce a healthy dividend. Recent data out of China and Japan bodes well for Iron ore. Shares have been trying to base and remain in a channel down since January, current resistance at $32 and support at $28, while $29 remains major support from May lows and the September breakout level, so reward/risk is compelling. VALE August $32 calls were extremely active with buyers on June 16th, more than 30,000 traded including one block of 8,300 at $0.80 on the CBOE, and open interest in that contract doubled, now sitting at 61,376.

Coal
Arch Coal (ACI) shares have been under pressure since announcing the acquisition of International Coal (ICO), a longer term positive as metallurgical coal is the hottest coal group. Shares have fallen more than 30% off April highs. Arch Coal is trading 6.4X forward earnings, 0.42 PEG, 1.58X sales and 1.78X book value. On May 12th, Standpoint raised to Buy with a $37 target. Arch Coal was the focus of bullish option traders on three occasions last week. On June 14th, more than 10,400 July $26 calls were bought to open, while on June 16th 4,600 July $27 calls were bought to open, and finally on June 17th more than 11,600 July $25 calls were bought to open as $1.2 million in call premium was purchased. 30 day implied volatility in Arch Coal jumped 15% last week.

Gold
Barrick Gold (ABX)shares are trading 21% off a recent double top at $56, at August 2010 lows, while Gold prices are barely off all-time highs, a major disconnect. Barrick shares trade 9.4X earnings, 3.77X sales, and 2.1X book value. Stifel raised shares to Buy with a $70 target in late April. Barrick Gold saw a few large bullish option positions last week. On Friday, more than 2,500 October $43/$47 call spreads were bought at $1.53, a nice reward/risk trade. On June 16th, more than 11,350 July $45 calls were bought to open, looking for a nice run in shares in the coming month.


There are likely a few names I am not mentioning, but all of these took place within the last week, so the trend is noteworthy. If the market shows signs of bottoming this week, I would concentrate on being long metals for the reversal move.

Cisco (CSCO) - Long Term Option Strategy Beats Buying Stock

As a lead in I have always felt that there really is no sense ever buying an equity where the options are liquid with tight spreads, because if you are confident in your view, the use of leverage allows you to better position for larger gains, whether you want to use deep in-the-money calls/puts or play the upside with out-of-the-money options. Also, if you are a long term investor willing to buy a stock at a certain level, why not just sell a cash secured put where you improve your cost basis due to the premium. If your fear is missing a big upside move, you can go long a call along with short a put for a risk reversal, a strategy that can amass huge gains if you catch a trend, or use a synthetic.

Anyway, I wanted to take a look at Cisco (CSCO), the $82.8B much-maligned former Tech leader. For months I have seen "value-gurus" trying to call the bottom and get long this Company, first on the move down to $18 on earnings, and more recently around the $16 level. Cisco is cheap on all metrics, trading 8.85X forward earnings, 1.9X sales and 8.95X cash flow, and also with around $40B in cash, or nearly half the market cap. One would question why management is not actively making acquisitions to drive growth, or returning money to shareholders in the form of a dividend, or even a special one time payment. Either of these actions would result in shares heading higher in my opinion, just anything to change the current sentiment, or maybe even a shakeup in management.

I'd rather not get too deep into the Cisco situation, as my goal is to lay out a strategy that is a much better play than simply trying to catch shares in this sharp trend lower. Shares are nearing the $14 level, which would be a 50% haircut from the early 2010 highs, and also a spot for a potential double bottom with the 2008 lows.

Most of the Street maintains $20+ targets on shares, seeing the longer term value.

The trade that caught my eye today was 10,000 January 2013 $20/$10 bullish risk reversals at a $0.23 Net Debit, buying the $20 calls and partially funding via selling the $10 puts.

The $230,000 outlay is a 41 Delta position, or equivalent to being long 410,000 shares of Cisco stock.

Through this strategy you are leveraged to being long Cisco, and if shares head higher the value of the calls increases, while the value of the puts decrease, and as that spread widens, a relatively small move higher in the stock can quickly double, triple, or more your $0.23 basis on the spread. I would note that the spread requires margin, so you would want to do this at a size where you are willing to be long Cisco (CSCO) at $10, so if you want $25,000 of Cisco, you can put on 25 of these spreads (note cost basis is actually $10.23 due to the debit, adjust accordingly).

The beauty of this strategy is that for a small outlay you limit your risk, but can participate in more of an upside move. If shares were to somehow tank below $10, making Cisco (CSCO) the greatest value buy of all time, you are willing to be long stock at $10.23, and did not just lose 33% on your equity position. If shares of Cisco have a resurgence and reach $25 by 2013, the spread is worth $5, roughly 20X your investment.

I would also note, if you see even less downside potential in Cisco, you could put on the January 2013 $17.50/$12.50 bullish risk reversal for less than $0.10.

These type of spreads are often done at a net credit, my preference, so you have zero outlay, willing to be long at a certain level, but able to participate in an upside move with maximum leverage.

These risk reversals are risky for growth stocks and high Beta stocks, but when you are looking at a beaten up value name with a limited downside view, it can really accelerate your returns.

Good Luck!

Could Rio Tinto (RTP) Acquire the Rest of Ivanhoe Mines (IVN)?

Ivanhoe Mines (IVN) is a $14.5B miner that is trading 3.88X book value. It's principal property is the Oyu Tolgoi copper & gold mine development project in southern Mongolia. The Company announced on June 9th that construction is ahead of schedule, currently 23% complete.

Ivanhoe is partnered with Rio Tinto (RIO), a $129B miner with nearly $10B of cash on hand, and always willing to make deals. Global mining M&A should be strong moving forward for cost efficiency, and most every CEO, whether it be for Gold, Silver, Copper, or other metals, has shown confidence that metal prices are only going higher.

Ivanhoe owns 66% of the project, with Mongolia's government owning the rest, and Rio Tinto owns 42.1% of Ivanhoe, and can raise its stake to 49%. Ivanhoe's CEO also owns 15.5% of the Company, a positive sign.

Ivanhoe's chart is not a thing of beauty to say the least, breaking support o a $6 horizontal channel at $23 that would measure a move to $17, while $19 is major support as a re-test of a big breakout level from September 2010.

Ivanhoe Mines has caught my eye lately due to the options action, the January 2012 $25 calls which traded 5,585 contracts today, and buyers paying $2.20 on a $2/$2.25 bid-ask, aggressive bullish trades, and these contracts have been seeing action for more than a month.

Ivanhoe typically trades just 1,790 calls a day, but has been running well above that pace lately. The January $25 calls had open interest of 21,594 contracts going into today, and likely to increase with the volume seen today. On May 13th there were only 521 contracts in open interest and then:

1) May 16th: 3,670 contracts bought
2) May 17th: 5,411 contracts bought
3) May 20th: 1,072 contracts bought
4) June 3rd: 7,926 contracts bought
5) June 6th: 2,535 contracts bought
6) June 7th: 1,645 contracts bought
7) June 8th, 1,170 contracts bought

On May 18th a trader bought 210,000 shares of Ivanhoe, along with 15,000 January $17.50 puts in a hedged play, betting on increased volatility.

The implied volatility (IV) of that contract has jumped from 42% to 47.3% over the course of that time as well, and the September IV Skew is exhibiting a bullish smile, while January s surprisingly normal.

Logically it would make sense for Rio Tinto to acquire the rest of the Company as the Mongolian asset is seen as a crown jewel, so better to make an offer before the mine is actually producing and Ivanhoe's shares are re-valued higher.

Ivanhoe also owns part of Ivanhoe Nickel & Platinum which made majro Tier 1 copper discoveries in South Africa back in February.

Packaging and Paper M&A is Hot -Who's Next?

...MeadWestvaco (MWV) and Bemis (BMS) are Two Names that Stick Out...

Temple Inland (TIN) recently received a $30.60/share offer from International Paper (IP), a 44% premium, valuing the Company around $3.3B, or 15X earnings, 0.85X sales, and 3.5X book value. On EV/EBITDA, commonly used in M&A Analysis, TIN is at 9.3 while MWV is at 6.8 and BMS at 6.9, so MeadWestvaco/Bemis look to be better values here, and in an industry seeing a lot of consolidation, a potential takeover target. Remember, that Silgan (SLGN) bought Graham Packaging (GHM) for $1.3B back in April also.

There has been notable call action in packaging names the last few days since the deal was announced, looking for the next target, and seen in names such as Crown Holdings (CCK), Avery Dennison (AVY), Packaging Corp (PKG), Rock-Tenn (RKT), Boize (BZ) and Sealed Air (SEE).

There was notable action in Crown Holdings (CCK) today with 3,450 In-the-Money October $37 calls bought to open today, detailed to subscribers in full earlier today. However, MeadWestvaco (MWV) traded 2,036 calls on the day with offer side buyers, more than 10X daily call volume as 739 June $35 calls traded and 1,184 July $35 calls. IV was up modestly and the action was unusual, although very cheap contracts, but potentially thinking buyout.

MeadWestvaco Corp (MWV) is a $5.55B packaging Company mostly geared to the consumer related industries that trades 14.4X earnings, 0.96X sales, and 1.63X book value.

On May 14th UBS recommended IP as its top pick, but also noted it liked TIN and MWV, raising its target to $37 a few weeks prior. RBC has a $40 target and JP Morgan a $38 target. MeadWestvaco shares have a confirmed uptrend off the Summer 2010 lows, through the March 2011 lows, coming into play at $31, support, and currently in a narrow channel down, consolidating while momentum indicators begin to trend bullish, near a bullish MACD and ADX crossover.



Purely on valuation and technicals I have to favor Bemis (BMS), a $3.5B maker of flexible and pressure sensitive packaging. Shares trade 12.8X earnings, 0.68X sales and 1.86X book, cheaper than most of its peers and offering a 2.9% dividend yield. Sales grew nearly 30% Q/Q and EPS at 73.36% clip. There is 5.1% of the float short, or 7.17 days to cover. The Company was positive on business fundamentals at a Goldman Conf. in late May. KeyBanc raised shares to Buy with a $38 target on February 3rd. Specialty resin prices have impacted results in the past, as a commodity cost, but I am unable to find a good source for how pricing is currently tracking. The chart is a thing of beauty, an ascending triangle that finds support at the 200 EMA and bounces, and is now looking to breakout at the $33.50 level, strong volume buying the last 3 days.



The entire group is looking fairly cheap on valuation with healthy dividends, and the potential for M&A, so I like a lot of the names.

Will Oil Service/Equipment See Increased M&A? Is Cameron (CAM) a Target?

The Oil Services (OIH) group has outperformed the market recently and Crude seems to magnet to the $100 level, buyers at $95 and sellers at $105. I would expect M&A in this group moving forward, as valuation is fair, and synergies can result in great cost-savings. It is also no secret that the large Exploration and Production companies are boosting CAPEX, and some may be interested in integrating a service Co.

In 2010, Schlumberger (SLB) made an $11B deal for Smith International (SII) and in 2009 Baker Hughes (BHI) made a $5.5B deal for BJ Services (BJS), so this is an industry that is consolidating. The Smith Int'l deal was done at a 37.5% premium and the BJ Services deal was done at a 16% premium. Halliburton (HAL) could be next to strike, the $45.9B Company.

On valuation, Complete Production (CPX), Helix Energy (HLX), and Superior Energy (SPN) are three smaller names (All Under $3B) that are attractive targets, but I am looking for a big deal in this group, and Cameron International (CAM) is the name I am looking at. Weatherford (WFT) is the long rumored buyout target with a $14.4B market cap, while National Oilwell Varco (NOV) is another potential suitor in this space.

Cameron International (CAM) is an $11.3B maker of Drilling & Production Systems. Shares trade 13.35X forward earnings, 1.8X sales and 2.45X book value. Cameron shares have come down from recent highs above $60 to $46 and are re-testing a major breakout level from last November, likely to base around this level.

Cameron (CAM) has caught my eye as 32,775 August $48 calls have accumulated in Open Interest, which began on May 26th when 16,000 were bought around $3.60, another 8,800 bought on May 31st around $3.40, and a block of 5,300 bought on June 2nd at $2.70.

That is a whole lot of money sitting in that contract looking for a move higher. Maybe it is just a technical or fundamental call, as I can see the bullish argument for both, but a large M&A deal in Oil Services also makes a lot of sense to me, with Halliburton the likely buyer, and likely a stock deal, which has been the norm in this industry.



Disclaimer: I am just speculating and stating facts and have no inside information

Ethan Allen (ETH): Put Volume Soars to 240X Avg. - A Seasonal Sell?

Ethan Allen (ETH) shares fell 6% as MasterCard Spending Pulse data showed weak spending in furniture and it traded 6,066 puts on the day, 240X daily average with most of the action on the offer as bearish buyers cause IV30 to jump 21.8% on the day. The August $20 puts were the target today as 4,286 traded against OI of 62, opening positions.

The $594M home furnishing Co. trades 24.3X forward earnings, 0.89X sales and 13.35X cash flow, and a massive 19.3% short float, 19.5 days to cover. There was also no signs of buyers in the underlying stock on the day, so it looks to be plenty of outright bearish bets, mainly from 3:44pm to the close.

Meanwhile, Pier 1 stayed positive on a day that was weak for retail after reporting strong same store sales growth, potentially stealing market share from Ethan Allen.

Looking at the chart we have a clear double top at $25 from April 2010 highs and April 2011 highs, a very similar seasonal pattern and history may repeat itself here. Shares broke $21.30 that was acting as support and now are sitting right on the 200 day EMA that looks unlikely to hold, and a break below the 38.2% Fibonacci would target a move to $19, and then possibly lower. Shares also closed below the lower Keltner Channel, which over the last two years has resulted in sharp sustained sell-offs.

The best approach here may be to wait on a weak volume bounce to around $21.50, and let the IV come down a bit, but longer term, the put options look to be a good choice.

Options Expiration Pins for May 20th

Options Expiration Strike Pegs:

AMZN Max Pain $190 - Looking for $200 Pin - $195/$200 1X2 Call Spread an Option

GOOG Max Pain $535 - Selling the $530 Straddle an Option

BIDU Max Pain is $135 - May $130/$135/$140 Butterfly Spread an Option

POT Max Pain at $55 - June $55 Calls at $1.50 Cheap

CAT Max Pain $105 - May $105 Straddle Sale an Option

PCLN Max Pain at $515 (Shares at $522) - May $525/$515 1X2 Ratio Put Spread an Option

AAPL Max Pain $340 - May $340 Straddle Sale an Option

NFLX Max Pain at $240 - May $245/$240/$235 Put Butterfly an Option at $1.75

FSLR Max Pain at $135

GS Max Pain at $150

OXY Max Pain at $100

BA Max Pain at $77.50

IBM Max Pain at $170

CRM: The Force is Strong with this One

Salesforce.com (CRM) is trading 7.9% higher after hours to $146.50 ahead of the CEO on Cramer, and the Company beat by a penny on EPS but beat big on revenues, and along with raising its guidance, it showed new customer adds, the real key to its report as it continues to show itself as the leader in cloud computing, which is still fairly early in the growth stage. In this case it is best to throw away traditional measures of valuation and use a more common sense approach, realizing that cloud computing is going to be the future for every Company and the transition is in the early stages.

I previewed the quarter for subscribers last Sunday:


Earnings Focus
Details: Salesforce.com (CRM), $134.91, Technology - Application Software, Earnings May 19th After Market Close

Earnings Expectations and Keys to the Report: Analysts are expecting $0.27 EPS and $482.45M in Revenues for the Quarter and $1.27 EPS and $2.11B for FY12 estimates. Estimates are factoring in 28% growth this year in revenues. Last quarter subscription revenues grew 31% Y/Y and 5,100 new customers were added in Q4 to a total of 92,300. Analysts and Traders will focus on subscription revenue growth and new customer adds. Also, the launch, and early read on the success of Chatter will be eyed on the Conference Call. Salesforce's $326M acquisition of Radian6 should be a positive moving forward for social media channels, and acquisition costs will cause a discrepancy in the headline Non GAAP and GAAP numbers.

Previous Reports and Reactions: Shares jumped on the report/outlook last quarter, but faded quickly, sinking that day and for a few weeks following the report. In 3 of the past 7 quarters, Salesforce has made a 15% or greater move, while the other 4 quarters the move only averaged 3.5%. The quarter before last resulted in a strong gap up, followed by strong buying to close the day at highs, and then continuation to all time highs.

Technical Analysis: Salesforce shares are making a series of lower highs in a channel down pattern since reaching all time highs in December 2010, recent resistance at $140, and the channel bottom extends to $115, a potential target as it would also fill the November 2010 gap. If shares were to break $140 on earnings a move to $150 would likely be quite easy, and potentially as high as $165/$170. MACD and ADX are showing early signs of turning bullish and RSI is trending higher. Bollinger Bands are tight, and a big move looks imminent. Shares found the 200 day EMA as support in March, and that is currently at $122.50.

Fundamental Analysis: Salesforce shares are undoubtedly rich on valuation at 73X forward earnings, 10.9X sales, and 200X free cash flow, and although that has not mattered in the past, being priced for perfection is a dangerous game, and could result in sharp sell-offs on any negative outlooks concerning growth potential. However, smart acquisitions and customer adds, along with cloud computing still in the early stages leave Salesforce as a leader in the industry that is likely to remain at a valuation premium.

Analysts: Of the 31 Analysts covering Salesforce the average target price is $160, a high of $200. FBR raised shares to Outperform on April 7th with a $170 price target.

Sympathy Movers: VMW, FFIV, CTXS, ORCL

Options Activity, Open Interest Analysis and Volatility Analysis: Salesforce May IV at 65.9% compares to June at 45.27%, so front month volatility is definitely pricing in a move, the straddle pricing in a 7.5% move on earnings, although we have seen many of the high flying Tech names make much less than priced in moves on earnings in recent weeks. The IV Skew has a minor bullish smile for May options and is fairly flat going out to later dated months. Salesforce has not seen a lot of large option trades in recent weeks, notable buying of the May $130/$135 call spreads for 2,500 contracts on May 4th. I feel the straddle is fairly cheap here and expect more than a 7.5% move in shares on earnings considering the recent tight trading range, and historical movements.


Now, on May 17th, just 2 days ahead of earnings there was very bullish options action in Salesforce ahead of the quarter, and I put out the following note to subscribers:

OPTIONS RADAR: Salesforce Call Spreads Active Ahead of Earnings

Ticker/Price: CRM ($129.20)

"Salesforce (CRM) June $140/$155 call spreads with 2,000 bought at $2.50, earnings May 18th, and then another 6,000+ were bought as call volume jumps to 26,500, or 3X daily average with opening bullish buyers, and not seeing any short stock with the spreads. Also, similar bullish action seen yesterday with these spreads and plenty of May $130/$135 call spreads still sitting in open interest. Shares rebounded a bit off support today and are set to close in the green. The larger picture channel down has resistance at $140 and support at $115. Shares of the cloud computing leader trade 69.7X earnings, 9.3 PEG and 10.4X sales, and the recent launch of Chatter could get investors excited this quarter as the Company continues to win new clients. Morgan Stanley noted this morning that it expects a solid print, but remains Equal Weight. "

The action continued today right up until the report, including a buyer of 1,000 May $145/$150 call spreads at 3:28pm, and the 345/350 May ratio 1X2 call spreads also traded in size.

All of my signals were bullish into the quarter, so the spread I recommended late in the day was the May 140/150/155 unbalanced butterfly call spread at $1.75. If shares hold around where they are trading after hours, a big IF as anything can change, the spread should work out very well. For the more neutral traders looking for a safe trade I recommended the May/June $150/$120 Double Calendar Spread, which should also work out very well.



Looking at the chart, shares broke trend resistance late today after a great support bounce at $127.25 two days ago, and on the break of this pattern of lower highs at $140, shares should hit $150 easily, and be well on its way to $175.



Disclosure: Long Calls and Spread Noted Above

Sherwin Williams (SHW): Painting a Bullish Picture

Sherwin Williams is a name catching my eye, a great ascending triangle has setup above the prior resistance, now support at $79. If shares can push through $86.30 on volume it would measure a move to above $90. ADX is climbing after a bullish crossover and RSI is rising, although a bit overbought. Shares have topped out here previously and I do see a Red 13 on DeMark, but the 3rd attempt is usually the breakout move, so definitely one to watch in coming days.




As for the fundamentals, Sherwin Williams has a $9.1B market cap and trades 14.65X earnings, 1.13X sales and 23.6X cash flow, fairly valued for a Company with modest sales growth. The Company would benefit from the recent action in commodity prices, lowering raw material costs, and increasing margins and profits, the Raw Material Cost Index currently at 10 year highs. Home Depot and Lowe's both recently reported earnings, and the results were not spectacular as the housing cycle remains near the bottom, and no clear signs of a recovery, but as we enter the Summer, projects should pick-up and homeowners looking to increase the value/attractiveness of their homes could go for a new paint job. Home Depot noted on it's Conference Call that it expects more maintenance and repair than major renovations and is beefing up its paint offerings.

BofA-Merrill recently reiterated a Neutral rating and $92 price target after the Company's Annual Meeting. The Company is now targeting a younger demographic via HGTV and Digital Media and is also set to raised prices on coating by 7 to 9% on June 6th.

One trade to consider is the June $85/$90 1X2 Ratio Call Spread for a $1.40 Debit


A simple June $85 Call at $2 or Better Looks Fine As Well

S&P 500: Current Technical Outlook

The S&P traded in a choppy narrow range last week and closed the week slightly lower than where it opened, and is flirting with a technical breakdown. Shares have formed a descending triangle above the 50 day EMA and prior support at 1,330, along with a 50% Fibonacci Retracement of the 1,290 to 1,370 range.. A break past 1,350 is needed to break the short term trend lower and make a push to new highs around 1,375 in a bigger picture rising wedge. If we can break to 1,375/1,380, the 1,400 target may not be achieved initially, and we could see a push back towards 1,300/1,250 in seasonally weak months of trading, possibly with resistance at 1,400, the next Fibonacci extension. In the near term of a break of 1,330 we would lose a long term trend from last August, and 1,300 is the initial target with the April lows and 100 day EMA, while 1,280 is a Fibonacci support level, and the 200 day EMA at 1,250 is major support, also the March lows. I also see 1,312 as a minor support level as a gap fill from April 20th, and a Fibonacci level. A buy signal near term would confirm with a break past 1,350 and the RSI breaking above 50. The 50,100 and 200 day EMAs are all rising with a bullish slope, while the 20 day EMA is flattening and a potential bearish cross of the 20 day EMA with the 10 day EMA from above is worth watching as a bearish signal.

Conclusion: Buy Above 1,350 with RSI > 50 with 1,380 Target; Fade a 1,400 Target with Stop at 1,410 and Target to 1,350/1,325/1,300/1,250; Sell Below 1,330 with 1,300 Target; If 1,250 is Seen, Load Up Aggressively!

Apple (AAPL): Prepping for Explosive Move - Traders Get Long Volatility into Developers Conf.

Apple (AAPL) traded a large spread on the PHLX May 12th that I am trying to drill down on, between 3:15 and 3:25pm. All in all it appears that at 3:17pm a trader bought 4,000 May $350/$355 call spreads at $1.29 and 4,000 May $335/$330 put spreads at $0.36. After that the trader looked to June and bought 4,000 June $370/$375 call spreads at $0.60 and 4,000 June $335/$330 put spreads at $1.20. I am going to operate under the assumption the trader is closing a May short Iron Condor that worked nicely, and now going long a June Iron Condor.

Apple has been in a tight range and is due to breakout or breakdown, which is what these trades are looking for, and comes after Goldman recommended earlier this week to be long Apple volatility into the June 6th Developers Conference where the Company is expected to discuss its cloud initiative. The event averages a 5.4% move in shares and Implied Volatility is at all-time lows. Goldman recommended the June $350 straddles at $19.40.

Apple Bollinger Bands are not really squeezed too tight, but shares have traded in the $340 to $355 range for 3 weeks. Shares are basically consolidating along the trend line that it broke out past, and that was a descending triangle breakout with a measured move to around $385, all time highs. If shares were to breakdown below $340 there is not much support and another test of $325 would be likely, and I doubt it would hold again, so the 200 day EMA at $315 would be a downside target. The last time Apple's ATR Wilder was this low was in February, where shares topped, and made an explosive move lower. This is not to say that the next move for Apple is lower, but more a sign that an explosive move is nearing. Either way, the $19.50 straddle seems like a smart play, but let's take a look at today's trade. The trader paid $1.80 for the June Condor and a potential return of $5, $3.20 in profits, or nearly 180% gains, if shares were to close June expiration either above $375 or below $330.




I also like to look at valuation and Analyst estimates to get a feel for the range shares of a certain stock can trade. OpCo recently started shares Outperform with a $450 target, Argus raised its target to $415, ISI group raised its target to $425, Wedbush raised its target to $445, Citi raised its target to $435, UBS raised its target to $495, Jefferies raised its target to $500, Goldman raised its target to $470, and Barclay's raised its target to $465. Basically, it's a safe assumption that Apple shares can easily trade North of $400. As for the downside potential I do not see any way shares can trade less than 10X forward earnings, so $285 is the maximum downside.

In my view, Apple has greater upside than it does downside, so a bullish strategy, the risk reversal trade, would involve selling the June $315 puts and buying the June $365 calls for a $0.25 Net Credit.

Your worst case scenario is that Apple shares fall and you are put shares at a $314.75 cost basis, which is much better than just buying shares now and hoping for the best, and is why option strategies are almost always better than being long stock.

Polaris (PII) - Ratio Put Spread Looks for Slow Slide, Gap Fill

Polaris (PII) recently reported a blowout quarter, and now shares have consolidated in a tight range. The growth story is intact here, and on any significant fall I would be a buyer of this stock, but one trader is looking for a slide in shares:

Polaris (PII) traded 4,675 puts on the day, more than 20X the daily put volume. The action was in September where the September $95/$85 ratio put spread traded 1,500X3,000 contracts at $0.17, a small debit for a bet on a slide in shares, and also a bearish bet on volatility as the spread will become profitable if shares fail to make new highs and trend sideways the next few months, a positive Theta and negative Vega trade structure. The trade is profitable in the $75.15 to $94.85 range, shares currently at $103.43. Maximum Profits are made if shares end at $85 on September expiration, where each $17 spread would be worth $983, a massive percentage gain.



Looking at the chart you can see shares gapped up last quarter on earnings from $92.50 resistance all the way to $105, and clear gap support at $102.50. A slow gap fill move back towards $92.50 would make this spread work perfectly over time.

Shares of the $3.5B maker of recreational vehicles trade 15.4X forward earnings, 1.63X sales and 19.9X cash flow, fairly valued, but sales are elastic to oil prices and consumer discretionary spending. There is a 10.1% short float, 7.2 days to cover.

Wells Fargo recently raised 2012 earnings estimates to $7, and a P/E of 15, its historical average would put shares at $95, so one could argue shares are over-valued. Shares are trading at 5 year highs on Price/Sales and Price/Earnings. However, earnings growth and margins are also making 5 year highs. RW Baird cut shares to Neutral from Outperform, but raised its target to $125 from $90 recently, which seems unusual as a stock with 20% upside is generally at least an Outperform.

Disclosure: No Current Position, Set Alerts for $102.50 Breakdown

PSS World Medical (PSSI): Stealth Options Action of the Day

PSS World Medical (PSSI) traded 50X daily call volume as 1,000 June $30 calls were bought on the CBOE at $0.625, with the bid-ask at $0.55/$0.80, so not an aggressive purchase, but appears to have been a buyer based on the IV movement. Earnings are May 12th before the open and shares are at all time highs, and have jumped on earnings the last 2 quarters. The $1.6B Medical Equipment Co. trades 19.5X earnings, 0.8X sales, and 17.5X cash flow. There is a 14.95% short float, 16.35 days to cover, so a short squeeze is a real possibility. If earnings turn out not to be the catalyst there is also the Jefferies, Goldman and William Blair Conferences in June where the Company will be presenting. Last quarter the Company guided FY11 above the Street. PSS World Medical is a supplier that is a direct play on the aging baby boomers as it supplies to alternate site physician practices and elder care businesses. Credit Suisse has an Outperform rating on shares.

Archer Daniels (ADM): Option Trader Sees Further Downside with Ratio Put Spread

Archer Daniels (ADM) shares continue to slide post-earnings, and one bearish trader sees more downside potential for the grains Company. The trader traded the June $34/$32 ratio put spread for 2,500X5,000 contracts at $0.27 debit, looking for a fall to $32, and seeing limited upside despite the valuation. The trader's profit zone is from $30.27 to $33.73 (See Below), and with the trade also Vega Negative, the trader can close this trade for a profit if shares stay below $35 in coming weeks.



Put volume was 3X daily average.


Shares could see further downside as farm subsidies are argued in Government. The $32 level is a major support level, and shares recently lost $34.50 support, now with a gap fill to $33, and a measured move to $31.50 on the most recent breakdown. The chart below highlights this trades' profit zone in orange.

6 Speculative Option Trades on Small Caps Reporting Earnings this Week

Every week I look to the week ahead and screen for small caps that report earnings and then filter them out by looking at fundamentals and the charts using FinViz to find some names that others are likely not watching, but could trade strong post-earnings. Although the options tend to be illiquid, I will provide a few speculative ideas here, although I often just buy the stock in front of earnings.

1) ION Geophysical (IO): Shares of the $2B Seismic Technology Co. with strong ties to Oil & Gas CAPEX, which is strong in FY11, trade 18.3X earnings and 4.4X sales with 30.8% quarterly sales growth. Shares have been consolidating since the last earnings jump and are in a tight triangle, ready to break higher.

Trade: Long the IO May $13 Calls at $0.50 or Better (May 5th Earnings AMC)



2) TTM Tech (TTMI) is a $1.55B maker of printed circuit boards, similar to Jabil (JBL) which posted strong results recently. Shares trade 9.4X forward earnings, PEG of 1, 1.3X sales and 2.1X book with a 7.9% short float. Shares are trading in an ascending triangle with $19.50 the breakout level for a measured move to $23.50.

Trade: Long the TTMI June $20 Calls at $0.90 or Better (May 5th Earnings AMC)



3) CSG Systems (CSGS) is a $734.35M provider of customer care and billing solutions for the cable industry, which has seen strong results. Shares of the software Co. trade 8.5X forward earnings, 1.34X sales and 7.2X cash flow, a good value. There is also a 5.85% short float, 7 days to cover. Shares are trading in an ascending triangle pattern with $21.30 the breakout level for a measured move to $25.

The Trade: Long CSGS June $22.50 Calls at $0.30 or Better (Earnings May 3rd AMC)



4) Ares Capital (ARCC) is a $3.6B Diversified Investments Co. trading 11X earnings, 0.54 PEG, and 1.2X book value. Shares recently broke out at $17.60 to new highs.

The Trade: Long ARCC June $18 Calls at $0.30 or Better (Earnings May 3rd BMO)



5) Atlas Air (AAWW) is a $1.8B provider of air cargo solutions and trades 10.15X earnings, 1.34X sales and 7.1X cash flow. Shares just broke out of a symmetrical triangle after consolidating from a strong move on last quarter's results.

The Trade: Liquidity is a Problem Here, but Long the AAWW June $70 Calls at $3 or Better (Earnings May 4th BMO)



6) PolyOne (POL) is a $1.37B maker of specialty chemicals that trades 12.8X earnings, 0.8 PEG, 0.5X sales and 13.5X cash flow. Shares are in a $12.50 to $14.80 channel, and a breakout past $15 could target a move towards $17.50.

The Trade: Long POL September $15 Calls at $1.05 or Better (Earnings May 4th BMO)



Bonus: Silicon Graphics (SGI) is a $557M provider of high performance computing and storage with high growth rates, 88.6% sales growth Q/Q and coming off a big move on earnings. Shares have consolidated tightly and look ready for another surge.

The Trade: Long SGI June $20 Calls at $0.95 or Better (Earnings May 3rd AMC)



Disclosure: No Position in Above Mentioned as I Just Came Up with these Ideas. These are for speculation only, so only trade what you can afford to lose.

Sunpower Surges 38.65%: Were Option Traders Lucky, Good, or Cheating?

After the close it was announced that Total SA (TOT) has offered to buy 60% of Sunpower (SPWRA) for $1.38B, a $23.25 Tender Offer Price, and shares jumped 38.65% in one of the largest Solar deal to date, an industry that has yet to see much M&A.

I had recently posted a bullish "Options Radar" to clients, and here is what I posted on April 15th, just two weeks ago:

OPTIONS RADAR: High Delta Bullish Trades Surface in Sun Power


Ticker/Price: SPWRA ($15.80)

Analysis:

"Sun Power (SPWRA) is trading 6,700 calls, in line with daily average, but interesting action with the deep ITM June $13 calls trading 4,640 vs OI of 632, opening bullish buyers at $3.10. Shares have come down after a big earnings run and found support near $15.50 where the 100 day EMA is bullishly crossing the 200 day EMA. The $1.6B Solar Co. is turning into a major value name with a 15% short float, trading just 6.6X earnings, 0.37 PEG, 0.96X book and 2.49X cash value. US and German solar demand seems to be waning, so the Chinese solar stocks are favored currently, but traders are liking Sun Power on this pullback. Sun Power is working on a 250MW California Valley Solar Ranch, and is set to benefit from a Government push to solar components for power plants, recently receiving DoE backing."

As I noted, shares were a great value, and obviously Total SA (TOT) saw the same thing. The June $13 calls are likely to be worth at least $10 tomorrow on the open, a triple from when the near $1.5M worth of calls was bought less than 2 weeks ago.

Sunpower would have never been on my radar if the options action had not shown up in my scans, and this is why I think it is a must to follow options flow, as it often leads you to stocks that are going to move big, and in this case it happened rather quickly.

Sunpower has a great chart heading into this news with a strong volume bounce off support today, and this deal is sure to get Solar stocks heated again.

Amazon (AMZN): Reviewing Options Strategy for Earnings

I try and put together in depth earnings analysis reports in my chat ahead the major reports, and all signs were bullish heading into Amazon (AMZN) yesterday. Here is what I Posted:

OPTIONS RADAR: Amazon Action and Skew Looking for Move Higher on Earnings

Analysis:

Amazon (AMZN) is trading 1.65% lower into earnings and as of 2:15pm is trading 62,000 calls and 49,700 puts, 2X daily calls and 1.5X daily puts. There is mixed offer and bid side action with a positive overall net Delta, and net premium paid in Calls at $265K vs a -$1.64M in put premium played, a bullish bias. Amazon April IV is at 81.6%, May at 37.4% and June at 33%, the April options pricing in a 4.7% earnings move, basically the $175 to $190 range. IV Skew is also showing a bullish bend for April and May, so overall options looking to favor a bullish move. Shares bounced at $180 today, the 20 day EMA, and although the retail earnings are likely to be very strong, the focus will be on all the new growth initiatives with Cloud Music and other projects. Shares have clear resistance at $190, but would target $210 on a breakout. Amazon shares are trading 42.25X earnings, 2.44X sales and 33X cash flow, so a Beat and Raise is needed to trade higher. BofA reiterated a Buy and $198 target into the quarter, but did cite margins will remain under pressure. Deutsche Bank reiterated a Buy and $192 target, saying the Company will deliver despite Japan concerns. The largest trades today include a 1,012 contract May $185 synthetic long position at a $1.70 credit, the April $185/$195/$205 Butterfly Call Spread 430X860, and a few sizable May $180 and $175 put sales. The June $200 calls also trading a fresh 2,000 contracts, so all indications bullish into this report.


Previously that morning I highlighted the April/June $195/$175/$200/$170 Double Diagonal for $3 as a Neutral trade I liked with my targets at $195 and $175 depending on the report.

Later in the day we put that spread on for $3.40 and closed it today at $5.40, a solid 58.8% gain overnight.

The other thing was that I had such a bullish read on Amazon that when I saw it trade down to near $170 after hours I had a strong opinion that shares would bounce back, as you know if you follow my twitter feed. Before the open this morning I was telling clients I was extremely impressed with the earnings and see it as a $200+ stock, and when it broke $186.20 this morning it was go time. Amazon's performance was impressive, and on the open the April weekly calls lost a ton of value with shares opening near flat, and many of my clients grabbed some weekly calls and accumulated 300% profits intraday.The April $185 weekly calls were available at $1.50 this morning, and closed today at $11.95, and the further OTM calls even gained more on a % basis.

The addition of weekly options has allowed for awesome flexibility to trade earnings, both before and after the results are announced. It pays to know what the options market was betting ahead of the quarter, because you can avoid the risk of being involved into the report, and instead play the action the following day.

Definitely an exciting and fun day with Amazon options...expect much of the same in Baidu tomorrow.

Mastec (MTZ): Construction Co. with Great Fundamentals Attracts Bullish Options Action

MasTec (MTZ) traded 5,556 calls on the day, more than 30X daily average call volume as IV30 jumped 19.8%, yet shares were down 1.9% on the day. The action was in June, and mainly $22.50/$25 call spreads bought at $1.15 throughout the session, shares at $22.56 to $23. Earnings come after market on May 4th and shares have been in a strong trend higher, near all time highs, while a longer term measured move to $26 is still in play from the breakout at $15. Shares have been climbing since reporting results last quarter.

Shares of the heavy construction firm trade 14.94X earnings, 0.77X sales and 9.46X cash flow, which makes it cheap compared to larger peers like Fluor (FLR), Foster Wheeler (FWLT), McDermott (MDR) and Shaw Group (SHAW), and also with better growth forecasted and shown consistently. MasTec is involved with upgrading Utility and Communication infrastructures, which will obviously be in high demand moving forward. It also builds wind farms, solar farms, wireless communication systems, and delivers natural gas, oil and gasoline.

The most interesting business may be the emergency services for accidents and storm damages, considering the recent storms that have hit the South and Midwest, and done a lot of destruction.

The action came today as the Company announced the acquisition of Fabcor, a Canadian Energy Infrastructure Company, for $21.2M. On April 20th Wunderlich reiterated a Buy rating and raised its target to $26 from $21.

So, we have a momentum Company at cheap valuation and strengthening earnings seeing unusually bullish options activity, making MasTec look like a great Buy at these levels. The spreads are only looking for a bit over a 100% return as most of them were bought at $1.15 for a potential $2.50 return, and need at least a 5% move higher from here to start making money.



Disclosure: No Position at Time of Writing, but Considering as Long Term Investment